US equities fell a bit back to earth Tuesday after Monday's Pfizer-inspired gravity-defying vaccine booster shot everything higher; S&P was down ¼% heading into the close, after further gains in Europe. But the global bond sell-off has extended further: US10Y yields up 4bps to 0.96% and German 10Y products up a further 3bps. Oil up 2.3%. Despite the potentially game-changing vaccine results that drove sentiment yesterday, uncertainty lingers about the rollout timetable.
Equity markets are more mixed today as Monday's Pfizer vaccine news fades and markets reassess. While the story was undoubtedly positive, investors may wonder to what extent markets will keep rallying, given the known logistical challenges of distribution and remaining hurdles for approval.
Equities were already near record highs. While the leisure industry in particular stands to benefit from a successful vaccine, it’s not yet apparent that a vaccine will accelerate an economic recovery too much more than has already been priced. And what is priced via the market calculus now becomes the million-dollar question for stocks.
Still, market sentiment likely skews towards risk-on in the near term – although in the FX markets this is demonstrating itself more in the EM space than in G10 markets (where the USD is staying firmer).
Meanwhile, the US has reported more than 100,000 daily cases for seven consecutive days, raising the possibility of rolling lockdowns. Meanwhile, the ongoing standoff with the US President is preventing the President-elect's transition team from securing federal resources as the Trump campaign files more lawsuits to block the certification until all ballots can be verified.
In US equities, thematic moves and the rotation today weren’t as extreme as they were Monday. While the overall market seems reasonably stable and balanced right now, it feels like momentum/tech/growth wants to push lower as software's move is all-inclusive. Cyclicals continue to outperform.
You wouldn’t want to be a central banker speaking these days, would you?
The rear-view mirror is clouded by the impact of the virus and uselessness of data. Meanwhile, you can only see hope for the vaccine on the horizon, so it’s hard to know what to say about it. Speaking at Bloomberg's Future of Finance virtual conference, Dallas Federal Reserve Bank President Kaplan did his best, saying Q3 and Q4 this year will be challenging. The first half of next year will be tricky, but after H1 things look somewhat brighter. Still, he’s not entertaining the thought of tightening just yet, leaving those discussions for once the US has weathered the pandemic.
And echoing a dovish view, despite the vaccine news, San Francisco Federal Reserve Bank President Daly is resolutely dovish. The Fed is discussing what more should be done and what more might be needed, she said in an interview with Reuters, as she called for more fiscal support. The pace of growth ahead will likely be slower, but Fed policy can adapt to changes in the economy, she said.
Interest rate effect
Interest rates come back into play as the markets price in Covid-19 vaccine news. So much of the equity market bounce this year has been based on the lower for longer mantra. Risk has been able to price zero short-term rates and historically low long-term rates. However, if efficient self-correcting markets start to price at higher interest rates, then perhaps the market will need an asymmetrical response from the FOMC to address the market's newfound funding disadvantage. For example, implied 3m money at the end of 2023, when the Fed's current guidance ends, has increased 17bp in the last week, 7bp straight after the US election, and 10bp after the vaccine news.
The US 10y yield is at its highest point since the market dislocations of March. Of the 14bp nominal yield gain Monday, 7bp was real and 7bp was breakeven. The speed limit for the most rate-sensitive sectors in S&P is 30bp a month. It might not be long before investors once again start to think about the influence of the rate on equity.
The Malaysian Ringgit
The Ringgit remains clogged in a political impasse that sees the MYR backpedal to the 4.12 zone. Inflows dried up as political rancor around the budget has soured foreign investor demand for Malaysian capital market assets. However, with oil markets pricing in some level of a return to normalcy on the back of the vaccine news, the Ringgit’s good fortunes should return once the political clouds dissipate.
The British Pound
GBP is stronger on vaccine optimism, despite weaker labor market data and political uncertainty. UK job losses rose further in September while employment declined -164K, pushing the unemployment rate up to 4.8%.
The strength of GBP is attracting attention, though it’s hard to know precisely why. The FTSE equity index has a large value component, so perhaps the currency benefits from this rotation? Another alternative is that the UK has struggled the most among G10 peers to cope with the pandemic and therefore stands to benefit the most from a vaccine, given its large servicing sector.
The Japanese Yen
The JPY has been the biggest victim of US political and vaccine developments. This makes sense, given the JPY always exhibits the cleanest "risk-on" velocity. Still, one wonders how long the JPY weakness will persist. A strong correlation between equity markets and USD-JPY will likely hold up in the near term, while JPY-buying is likely to re-emerge quickly on any equity reversals.
The Australian Dollar
The Aussie is in consolidation mode, with US equity markets flat to lower. Traders are opting to turn more flexible, watching risk assets and US yields. There appears to have been decent supply at times over the past couple of sessions, initially towards 0.7300
The Turkish Lira
The TRY has given back a sizable chunk of Monday's rally as investors fret about the CBRT governor's failure to launch interest rates immediately; it triggered a lot of stop losses in the retail space.
Gold has been stirred, but not shaken
99.9 percent of the time, gold investors will struggle to get back in the saddle after a massive wallop and this time should be no different, so we could expect more wealth transfer from weaker to stronger hands for the next few sessions.
It’s worth taking a step back and do some post-meltdown forensics on Monday's $100 pullback in gold from a liquidity/volume and positioning angle.
The flows processed and the price action bore the classic hallmarks of weak hands wealth transferring to strong ones. Wanton selling from fast-money accounts eventually met with demand from longer-term strategic buyers towards the lows. OTC volumes were big l, around 2.5 times the week's average during yesterday's move (via Axi Institutional and Retail ECN channels). Futures volumes were inflated by a similar multiple with 496k lots trading on the Comex active December contract.
This suggests panic, but the price action had orderly aspects:
In summary, gold has been stirred but not shaken.
Gold's relative attraction is that it is non-interest bearing and can be repo'd to provide a small positive return. When bond yields are negative, a zero-rate commodity is attractive. But if inflation were to come and the ensuing rate rates rise would be held in check by the Fed, then gold will fly.
Oil market round-up
Traders remain fully confident and hopeful that OPEC will follow through in fixing the oil market’s leaky roof while it’s still raining Covid.
Crude oil prices continue to revel on the back of Pfizer's vaccine announcement. In reality, this is more about regularizing the economic activity and individual mobility through 2021 and 2022, suggesting that the near-term price impact should reflect more about OPEC+'s upcoming decisions on quotas or the level of lockdowns needed in the northern hemisphere through the forthcoming winter months.
Still, the front end of the curve has continued to move higher, with the front spreads tightening in both WTI and Brent, reflecting the 'bullish' sentiment that’s taken over due to the commanding price backstop recently offered up by OPEC+ and the compelling vaccine efficacy story which continues to underpin oil market outlook and is likely responsible for the massive short position squeeze across the curve.
Defying analysts' expectations again – who surveyed for a relatively small "draw" of 900k barrels – the American Petroleum Institute reported on Tuesday a significant draw in crude oil inventories of 5.147 million, which bullishly comes on the heels of last week’s shockingly large draw in oil inventories.
Back to back draws combined with the two puts are better than one (OPEC+Pfizer) has allowed oil traders to stretch their wings as a viable vaccine limits downside risk that has weighed on broader markets and the oil sector for much of this year. Traders remain fully confident and hopeful OPEC will follow through fixing the oil market leaky roof while still raining Covid.
If oil demand is ultimately judged by planes, trains and automobiles moving from point A to B, the vaccine will eventually improve that view and push oil prices back above $50 in 2021.
However, given the still-cloudy near-term outlook, producer selling could become more evident as price moves higher, triggering more December hedging. Even if there are no government-imposed lockdowns, people will likely keep their holiday festivities under wraps this year, confined to their abode.
So, with sentiment remaining skewed towards caution as demand likely continues to falter between here and year-end, further gains could be hard to come by.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies